The Effect of Corporate Governance Mechanisms on Bank Performance Evidence from Saudi Banking Sector

Abstract

Corporate governance mechanisms Bank performance Saudi banking sector ROA ROE Board independence Ownership of the largest Shareholder Foreign ownership Audit committee size.This study investigates the effect of Corporate Governance Mechanisms on bank performance, using a sample of nine Saudi banks during the period 2011-2016. The study employed six corporate governance mechanisms to examine their effect on two performance measures; ROA and ROE. In addition, the study used three control variables to separate the effect of the corporate governance variables on bank performance. Using panel data regression, the results indicated that board independence and the ownership of the largest three shareholders were the only corporate governance mechanisms that have a negative and significant effect on ROA. Board independence and the ownership of the largest three shareholders had a negative and significant effect or ROE, while the ownership of the largest shareholder and the size of audit committee had a positive and significant impact on ROE.Contribution/ Originality: This study is one of very few studies which have investigated the effect of corporate governance on the performance of Saudi banks. Most previous studies have been done before issuing the last principles of corporate governance in 2014. INTRODUCTIONCorporate governance has attracted a great deal of debate among researchers during the last three decades.Corporate governance can be defined as the system, structure, and processes through which businesses are directed and controlled (Lee, 2008). Many previous researchers (such as Brick et al. (2005); Kajola (2008); Jackling and Johl (2009); Black and Kim (2012); Zaman R. (2015); Taguchi and Wanasilp (2018)) found that a good corporate governance enhances profitability and increases firm's performance.According to Todorovic (2013) good corporate governance can prevent corporate scandals and fraud, reduce its civil and criminal liability, enhance its image and reputation and increase the confidence of stakeholders. Moreover, Narwal and Jindal (2015) indicated that for developing economies, good corporate governance is an essential tool for globalization of business organizations.

Oil Rent, Geopolitical Risk and Banking Sector Performance

“…As seen in Model 1, the relationship between GDP and ROA and the exchange rate and ROA are positively significant at (P < 0.01), while the relationship between ROA and the other control variables such as inflation, non-performing loans, and bank deposits are negatively significant. These results are consistent with previous literature on the relationship of these macroe-economic variables and banking sector profitability (Al-Homaidi et al, 2019;AlSagr et al, 2018;Belkhaoui et al, 2020;Bhattarai, 2018;El-Chaarani, 2019;Zampara et al, 2017). In Model 2, we add GPR and oil rents to the control variables presented in Model 1.…”

Does corporate governance affect the performance of Islamic banks? New insight into Islamic countries

“…Similarly, Chughtai and Tahir (2015), Faisal et al (2016) examined the IBs in Pakistan and Grove et al (2011), Wang et al (2012) in the USA, Farag and Mallin (2017) in Europe, Sakawa and Watanabel (2018) in Japan, Chazi et al (2018) in the GCC and Wasiuzzaman and Nair Gunasegavan (2013) in Malaysia, found that CG significantly affects the profitability of IBs. In light of past researches on IBs, some authors (AlSagr et al , 2018; Aslam et al , 2018; Bahreini and Zain, 2013; Farag et al , 2018; Grassa and Matoussi, 2014a; Mollah et al , 2017; Nawaz, 2019) have identified several essential CG mechanisms, and these include board size (BS), non-executive directors, CEO duality, audit committees and Shariah committee. Therefore, this investigation used the viability of these mechanisms as an intermediary to quantify the CG quality of IBs.…”

“…Thus, CG is widely accepted as a significant determinant to enhance banks’ performance (Aktan et al , 2018; Aslam et al , 2019a, 2019b). Therefore, banks with prudent CG structure are perceived to be more efficient in allocating the bank resources to generate more profit (AlSagr et al , 2018; Hussien et al , 2019).…”

Does Corporate Governance Matter for Asset Quality of Islamic Banks?

“…Audit committee is a standing committee of governance that is established to enhance the financial accountability, unwavering quality, and transparency in organisations, whereby the auditor and the management strengthen the financial reporting in the organizations according to the general accounting and legal standards (AlSagr et al, 2018). It also serves as a scaffold in the correspondence network among auditors and board of directors as well as enable them to adequately check the power of the board with specific reference to the accounting standards (Rehman et al, 2021).…”